Pros And Cons Of Buying A Fixer House

April 23, 1988|By Robert Bruss.

How can you make some money in real estate today? For the average individual, my answer is: ``Buy a fixer house.`` The surprising reply is usually, ``What`s that?``

A fixer house is defined as a sound, well-located but rundown house that needs upgrading. Because of its rundown condition, a fixer house usually can be purchased at a wholesale, below-market value. The profit opportunity comes from fixing up the house either to make a quick resale (called a ``flipper``) or to hold as your long-term residence or for investment (called a

``keeper``).

Although this is a family newspaper and I dislike using dirty words, the bad news is you will have to get involved with that nasty word W-O-R-K if you hope to make any money with a fixer house. Whether you do most of the fix-up work yourself, or hire it to be done as I do, you will get your hands dirty and at times downright filthy.

But the reward is worth the effort. I am working on fixing up a rundown house. Thanks to a terrific real estate agent who immediately phoned me when the house came up for sale, I purchased this house from a seller who didn`t want to get his hands dirty and was happy to walk away with less than he could have obtained if he first fixed up the house.

Until recently the competition for fixer houses has been practically nil. Probably 99 percent of home buyers want houses that are in excellent condition and command top-dollar retail prices. But the other 1 percent of home buyers, like me, want to buy at wholesale prices and are willing to fix up ugly duckling houses to make them into beautiful swans.

If you buy the right fixer house, it`s difficult not to make a profit. William Nickerson`s classic formula of spending $1 for improvements that add at least $2 of market value is the best guideline. The type of inexpensive improvements to make include painting, cleaning, carpeting, landscaping and minor structural repairs.

Avoid houses that need major or costly work that does not add much market value. Examples of unprofitable but necessary work include a new roof, new foundation, termite and dry-rot repairs, plumbing and wiring.

However, if the kitchen and bathrooms need extensive remodeling, don`t despair. These are the most profitable rooms to upgrade. A few thousand dollars spent on these important rooms can add many times the improvement cost to the home`s market value.

But a word of caution is appropriate. Most fixer houses need a combination of profitable cosmetic work and some unprofitable work. If your upgrading budget can reach its overall goal of at least $2 increased market value for every $1 spent on improvements, you will be profiting handsomely.

There are many sources of distress properties. Real estate agents are usually the best. Other sources include property tax sales, foreclosure sales, sheriff or marshal sales, probate properties, IRS tax seizure sales and bankruptcy trustees.

In larger counties, a daily or weekly newspaper or privately published newsletter prints the details of distress properties. In smaller counties, you`ll need to go to the local courthouse at least once a week to check the postings and recordings. Diligent inquiry of local county officials, title insurance officers and real estate brokers will reveal the best way to find these often unknown properties in your area.

However, don`t expect to be able to instantly buy a fixer house in a specific neighborhood. These houses become available in all price ranges from the cheapest to multimillion-dollar mansions, but you can`t just go out and buy a fixer house every day.

Often it takes months of diligent tracking to buy one house. For example, my latest acquisition came six months after I asked the real estate agent to phone me the minute he learned of a rundown fixer house for sale.

Special local rules apply to buying at property tax sales, sheriff or marshal sales, probate sales, IRS tax seizure sales and bankruptcy trustee sales. When you learn about the property being offered for sale, inquire about the exact bidding procedures.

But mortgage foreclosure sales, by far the biggest source of fixer houses, offer three opportunities to buy at a wholesale price:

- Buy before the public sale. Some distress property buyers prefer to buy before the public auction sale. This is done by contacting the distressed owner and offering to buy out the equity, sometimes for just a few thousand dollars.

But this is an emotional time for the property owner, who often is not thinking straight. Don`t be surprised if you are not successful buying from the distressed owner before the public sale.

- Buy at the public auction. Many professional buyers of distress property prefer to buy at the public auction. There usually are few buyers who have the cash required. But occasionally the bidding gets hot and heavy.